Vietnam Market Entry Decision.pdf

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Vietnam: Market Entry Decisions

companies, or to decide the level of profits on which it will collect taxes. Thepessimists had a field day in February, when the government dismantled all foreign-language billboards and painted out all foreign brand names on signs in Hanoi andHo Chi Minh City, as part of its campaign against “social evils.”

It's early days yet. When you visit Vietnam, it still looks mostly

undeveloped. The airports haven't been fully rehabilitated from the war, the roadsare awful, and there's little sign of industrial development. But get into the city, andyou'll find your hotel full of business visitors, you'll see the first tower blocks goingup, the place is full of energy, and the streets are lined with small shops piled highwith Western products. I've spoken to quite a few American managers who weresent here to assess the market entry situation, only to find their products already onsale all over the city. Some of it was counterfeit product, but some was genuine andhad found its way here from other Asian markets.

Many companies I've spoken to are playing wait-and-see, but the market isopen for business, and other firms are hoping for rich returns from getting in early.

Country Profile

The Socialist Republic of Vietnam was established in 1975 when, following decades of war,the country was reunified under the communist leadership of Ho Chi Minh. Vietnam had beenpartitioned into a communist north and a French-backed south by the 1955 Geneva Accords,following the defeat of the French colonial forces by Ho Chi Minh's army at Dien Bien Phu.Continuing tensions, and the increasing support of both Cold War military alliances, soon led torenewed war, which ended in 1975 with the withdrawal of American forces from the southern capitalof Saigon (subsequently renamed Ho Chi Minh City). In 1996, all aspects of government were stillcontrolled by the Vietnamese Communist Party and its Politbureau from the capital, Hanoi, in thenorth of the country. Ho Chi Minh City, the country's largest city, was regaining its former status asthe commercial center of the nation. (See Exhibit 2 for a map of Vietnam.)

Doi moi (“economic renovation”) was officially launched at the Vietnamese CommunistParty's 1986 Congress, and the subsequent reforms included deregulation of prices, reduction ofsubsidies to state enterprises, ending of the collective agricultural system, new commercial ownershiplaws to encourage private enterprise, new foreign investment laws, and policies directed toward thestabilization and convertibility of the Vietnamese currency, the dong. These reforms transformed apreviously distressed economy (in 1986, inflation averaged 775%) into one of the fastest-growing inthe world. Economic indicators and comparative data for the principal Asian economies are reportedin Exhibits 3 and 4. In 1996 the legislative program was continuing within the government's policyframework of “market socialism,” which aimed to create a market-oriented economy under thecontrol of the state.

This economic growth had been fueled principally by foreign direct investment (FDI) and theestablishment of new private Vietnamese-owned organizations. The state-owned sector accounted

for 40% of GDP in 1995, and comprised approximately 6,000 state-owned enterprises (SOEs), half thenumber that had existed in 1990. To date only three of these SOEs had been privatized (“equitized”).Government policy was to encourage foreign joint ventures with SOEs and to establish conglomeratesin key industries following the model of the South Korean chaebols. By 1995, 17 such conglomerateshad been established in industries including telecommunications, electricity, cement, steel, andgarment manufacture. A Vietnamese government trade official described the objectives of this policy:

We are changing regulations and reducing tariffs to attract sufficient foreigninvestment to stimulate industrial growth, but not so much that it stifles the growthof Vietnamese industry. The number of licenses granted in each industrial sector will

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be limited, and tariffs will be managed to balance imports and local production, inline with this policy.

Foreign investment commitments worth almost $8 billion were made in 1995, twice the levelof the previous year, bringing the total cumulative commitment since the launch of doi moi toapproximately $20 billion for over 1,300 approved projects. The total GDP of Vietnam in 1995 was

$19 billion. FDI projects in Vietnam averaged $14M to $15M of investment, compared with a $1Maverage in the People's Republic of China. Approximately $8 billion of these commitments had beenrealized, of which $4 billion had been realized during 1995. The four largest sources of FDI wereTaiwan (total cumulative commitment, $3.3 billion), Hong Kong ($2.2 billion), Japan ($2 billion), andSingapore ($1.6 billion), followed in rank order by South Korea, Australia, Malaysia, and France.U.S.-sourced FDI totaled approximately $1 billion since the lifting of the trade embargo in February1994, making the United States the tenth-largest source of foreign investment, and was increasingsharply. The major investment sectors were oil and gas, hotels and commercial real estate,telecommunications, services, and light manufacturing. In addition, Vietnam was pledgedinternational aid worth $2.3 billion for 1996, a 15% increase on the previous year, although manyprevious pledges had never materialized. The largest donor of foreign aid, which was intendedprimarily for infrastructure projects, was Japan.

Local private investment was running at approximately the same level as FDI, with some20,000 private firms registered by the end of 1995. Local entrepreneurs faced a shortage of capital, given the country's low saving rate and underdeveloped banking sector. A significant contributor of

both capital and human resources was the Vietnamese diaspora. The majority of the two million ethnic Vietnamese living abroad (the Viet Kieu) had fled from the south as the war ended in 1975 and had found refuge in North America, Western Europe, or Australasia. It was estimated that in 1994, 250,000 Vietnamese families had received a total of $500 million from relatives living abroad. In 1994 the Vietnamese government reversed its previous policy and instituted preferential terms for Viet Kieu returning to their homeland, including classification as domestic residents for the purposes of taxation and the establishment of joint ventures. The greatest concentration of repatriated Viet Kieu was found in Ho Chi Minh City, where their entrepreneurial activities and taste for Western products contributed to that city's status as the commercial center of the nation.

Vietnam's population of 74 million, growing at 2% per annum, was the world's twelfth largestand one of its most youthful: in 1995, approximately 50% of the population was aged 21 or younger.With a national literacy rate of 90%, the Vietnamese workforce was also one of the best educatedamong emerging markets in Asia. The recent economic growth had yet to change the livingstandards of the majority of the population, however. A 1994 World Bank report which praised thecountry's “impressive economic progress” also pointed out that 51% of the population lived inpoverty. GDP per capita was $235 in 1995, compared to $2,000 in neighboring Thailand, with fourtelevisions per 100 population (11 in Thailand) and 0.3 telephones per 100 population (3.1 inThailand). These averages disguised wide variation between the major cities, where economicgrowth had been concentrated, and the countryside, still home to 80% of the population. Thisdiscrepancy, along with increasing pressure on agricultural land caused by population growth, wasleading to significant migration to the cities. About 13% of Vietnamese lived in Ho Chi Minh Cityand Hanoi. Unemployment was estimated at 12%.

Vietnam joined the Association of South East Asia Nations (ASEAN) in July 1995.1

Membership entailed participation in the ASEAN Free Trade Area (AFTA), one of the targets of which was to reduce tariffs on trade between member countries to a maximum of 5% by 2003, a deadline extended to 2006 for Vietnam. In the same month, Vietnam signed a cooperation agreement

1 The other members of ASEAN were Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

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with the European Union (EU), which gave Vietnamese goods Most Favored Nation (MFN) 2 status inthe 15 EU countries and vice versa, and included a schedule of increased European aid to Vietnam.The restoration of full diplomatic relations with the United States, also in July 1995, allowed theopening two months later of negotiations regarding trade normalization between the countries,including MFN status. American officials demanded as preconditions for granting of MFN statusagreement on the issue of American military personnel unaccounted for after the end of the war, and

clarification of “the legal framework, intellectual property rights, trade practices, foreign exchangecontrols, human and labor rights.”

Forms of Market Participation

A number of entry modes were possible for an international firm seeking to do business inVietnam. All had to be agreed by the State Committee for Co-operation and Investment (SCCI).

The simplest arrangement was for an MNC to appoint a Vietnamese import agency andexport finished product to that agent from outside Vietnam. Formerly, this would have required aninternational firm to deal with one of nine state-owned import organizations, but recent reforms hadextended the granting of import licenses to privately owned Vietnamese firms, and an increasing

number of such small distributors were eagerly seeking to represent foreign MNCs. Importedproducts were subject to tariffs, which had been introduced to replace import quotas as part of thedoi moi reforms. In early 1996 these tariffs ranged from 5% to 100%, and averaged 25%, but weresubject to frequent government revision and were inconsistently applied by customs officials. Inaddition to a license granting importer status, a separate product-specific license was required for theimport or export of any item, however small, which had to applied for with the bill of lading at least aweek before the item was expected to arrive at the Vietnamese port of entry. Open licenses valid forsix months for specified items could be granted to joint ventures, BCCs, or foreign-owned ventures(see below); otherwise a license had to be obtained for each consignment.

MNCs wishing to invest in Vietnam had a variety of options. The government policyencouraged joint ventures between local SOEs and international organizations, and, in order to attractinbound investment, regulations permitted up to 70% ownership by foreign partners. The

Vietnamese partner usually contributed its workforce, premises, equipment, and land use rights, thevaluation of which could be problematic. The Foreign Investment Law included a buy-in stipulation,under which local parties could be granted the right to acquire an increasing share of foreign-ownedventures. In any joint venture designated by the government as an “important economicesta blishment” (mostly infrastructure development and energy industry projects), there was a legalrequirement for the local partner to increase periodically its capital stake (and therefore equity share)in the project. A majority equity share did not bestow managerial control, however, as the lawrequired unanimous voting by directors.

Government approval for wholly foreign-owned organizations was granted only in rare cases,typically large and complex projects, where joint ventures were not feasible. Like joint ventures, theseorganizations were limited to a 70-year life.

A processing contract allowed a foreign corporation to use a Vietnamese factory for productionor assembly. If the products were intended for export, the foreign company could import necessaryraw materials, could provide some of the equipment in the factory, and then re-export. To attract thistype of venture, five Export Processing Zones (EPZs) had been created, offering reduced taxationlevels and ongoing investment in infrastructure. Their reputation had suffered, however, from

2 In a trade treaty between two countries, agreement to an MFN clause required that each country would tradewith the other on terms at least as favorable as those agreed with any other country.

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problems with power supply and water shortages, and the EPZ in Haiphong collapsed in late 1995after the 70% owner, based in Hong Kong, declared bankruptcy. The most successful EPZ, TanThuan near Ho Chi Minh City, had attracted 60 projects. More recently, more projects had beenestablished in new Industrial Processing Zones (IPZs), intended as centers for both domestic andexport production. A number of consumer goods firms, including producers of cigarettes, soft drinksand beer, had licensed manufacturers for small-scale production while awaiting approval of their

joint venture applications for larger new production facilities.

A business cooperation contract allowed a private Vietnamese enterprise and a foreign partnerfreedom to design their own contract, and no legal entity was established. Such an arrangementrequired submission to the SCCI of annual accounts, from which the SCCI calculated the profit itdeemed the venture to have made, and levied taxes on the two partners at differential rates.

In 1995, the Vietnamese government published a list of major infrastructure projects whichqualified for build-operate-transfer ventures. Under such an arrangement, a foreign organizationwould be allowed to build a property, such as a power station or a toll road, and then retain theprofit from its operation for a specified time period, at the end of which it would be transferred toVietnamese ownership without further compensation.

Finally, foreign companies could be granted a license to establish a representative office inVietnam. The role of such offices was restricted to promotion of international trade, or technicalsupport for local importers or exporters, and such offices were prohibited to engage in investment,trading or marketing.

All forms of market participation were subject to approval by the SCCI and in many casesalso required separate approval by additional government ministries or by People's Committees atthe regional or city level. Consultants all warned that the granting of licenses was not only complexand time-consuming but also unpredictable, as procedures were often improvised because of theincomplete regulatory framework. One MNC, seeking to obtain a 70% stake in a joint venture, wasreported to have been required to pay 120 separate fees over three years to obtain the necessarylicenses, of which only 40 were required by regulations.

Doing Business in Vietnam

A number of additional factors were highlighted by consultants and managers experienced inSoutheast Asia as critical to any market entry strategy.

Distribution Potential distribution partners were plentiful but tended to concentrate only on aspecified area, often as small as a few blocks in one of the major cities. The choice facing any MNCwas often between a distribution organization partly or wholly owned by the government, and ayoung but small privately owned distributor. The former would probably boast better connectionswith officials but might prove less aggressive in selling, while the latter would probably be moreentrepreneurial but had yet to establish a customer base. National distribution required an extensivenetwork of distribution partners; the Castrol oil company had to establish its own fleet of trucks to

deliver motor oil to its many distribution points. The principal difficulty was described by oneconsultant as “telling the difference between the aggressive but competent distributor and thecowboys who will be knocking at your door as soon as you check into your hotel.” He also warnedthat Vietnamese business tended to be based upon a

trading culture. . . . Traditionally, goods have been scarce, and consumer demandcould be taken for granted if you managed to get your product to the market. . . . Theemphasis is still on moving product quickly, and negotiating over price, rather thanwhat Western firms know as marketing or positioning. Honda has excelled atplaying this game in selling motor scooters: the company appoints a large number of

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distributors, who then compete with each other to achieve the sales volumes theyneed to retain their agencies the following year. The result is that the cities areswarming with Honda motor scooters.

Corruption Despite a government campaign and an increase in criminal convictions, corruptionwas prevalent at all levels in both industrial and government sectors. One experienced Asian MNC

executive described Vietnam as “the worst country in Asia” in this regard, and attributed the problemto the generally low salary levels and the lack of an official schedule of fees for licenses and permits.One Vietnamese-American owner of a small Ho Chi Minh City distribution company indicated thatU.S. corporations were especially challenged by this problem: “Their legislation3 means that, if one oftheir managers gets caught, the liability can spread back up through the corporation. It scares themstiff, and it can put them at a real competitive disadvantage alongside Asian and Europeancompanies.”

Vietnam's long coastline and mountainous frontiers facilitated smuggling of goods into thecountry. Around 40% to 60% of the consumer electronics piled high at streetside stores in Ho ChiMinh City were said to be smuggled, as were 100% of the highly visible foreign cigarette brands(because they were formally prohibited). U.S. products had been widely available in the major cities

before the lifting of the trade embargo in 1994, including brands as varied as Kleenex (at three times

the price of local brands) and Kodak (a number of Kodak processing outlets were in operation in HoChi Minh City as early as 1992). Executives from Castrol had reported competition from competitive

brands of brake fluid which had been illegally imported as “motor oil” and thus charged only a 1%tariff instead of 35%.

Infrastructure Years of war and economic hardship had left Vietnam with little infrastructure tosupport its ambitious economic reforms. The 1,000-mile trip between Hanoi and Ho Chi Minh Cityrequired five to eight days by Highway 1—the only road linking the north and south of the country— or two days by rail. Vietnam's two major ports, Ho Chi Minh City and Hai Phong, were bothshallow-water harbors upriver from the sea, so large shipments had to be offloaded into smallerfeeder ships at either Singapore, Hong Kong, or Kao Siung, Taiwan. Both ports also lacked capacityand equipment to cope with booming imports, as did the country's main airports. Delays wereexacerbated by product loss or damage in transit running at rates as high as 25% to 50%. Office and

production premises could be subject to periodic power outages and telecommunications blackouts.

Costs One of the major attractions of Vietnam for foreign investors was the low level of labor costs.Typical monthly compensation in Ho Chi Minh City and Hanoi was $40 for an unskilled laborer (thelegal minimum wage), $100 for a secretary, and $200 for an engineer or manager. Additionalemployment costs were typically 50% of compensation. Rates were one-third lower outside the twomajor cities. Although the level of basic education was good, managerial talent was scarce. Foreigninvestors also faced high office rents, and the process of establishing an office was slowed by the needfor land-use permits for all premises. Telecommunications costs were also high, up to $20 per minutefor calls to the United States, for example. Both property and telecommunications costs wereexpected to fall with continued market development.

Profiles of Three Multinational Corporations

The three U.S. MNCs considering entry into Vietnam were all experienced in internationaloperations, and all aspired to global leadership in their industries. Exhibit 5 summarizes theirinternational distribution arrangements.

3The Foreign Corrupt Practices Act.

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Chemical Corporation Chemical was the world leader in chemical adhesives and sealants forindustrial applications. The company’s core product range, which always formed the introductoryline when entering new markets, was positioned as a replacement technology, offering superiorperformance-cost relative to more traditional mechanical fastenings and seals. The range of potentialapplications was wide, including virtually all manufacturing operations, after-market applicationssuch as automotive servicing, and even some consumer applications. The firm marketed its specialty

chemicals as low-volume, premium-priced, branded products and expected to have a diverse andfragmented customer base. This marketing strategy was built upon two major thrusts. First, salespersonnel were trained to tailor their offering to the individual applications of customers. Mostimportant, this entailed “pricing to value,” which required an analysis of the long-term savings to thecustomer of performance improvements from switching from traditional and ostensibly cheapertechnologies. Second, the firm strived to maintain technological leadership by requiring that 30% ofrevenues should flow from products introduced in the previous five years. In support of these twostrategies, Chemical, which enjoyed a 61% gross margin, invested 32% of its 1995 revenues in salesand marketing and 7% in R&D laboratories in the United States, Ireland and Japan. Chemical'sexecutives, who estimated their market share as high as 80% in the domestic U.S. market, viewedtheir major challenge as market expansion.

International distribution was a strength. From its foundation, the firm had been approached

by numerous distributors wishing to carry its products, and it was part of company lore that itsproducts were crossing the Atlantic Ocean before they crossed the Mississippi River. The globaldistribution network had evolved independently of manufacturing operations, because of the low

bulk-to-value nature of its products. By 1995, the company's manufacturing operations were locatedin the United States, Puerto Rico, Ireland, Costa Rica, Japan, and Brazil, with additional operations (tomeet local regulatory requirements) in India and the People's Republic of China. This logisticsnetwork could supply new markets at short notice: the ex-Soviet-bloc countries of Eastern Europe, forinstance, were supplied from Ireland via a warehouse in Vienna within three days of a newdistributor being appointed and/or placing an order.

Chemical favored independent distributors for market entry, because of their existingproduct ranges and customer base, which provided both economies of scope for the initial low-volume business, and access to industrial customers who felt no obvious need for this replacement

technology. The firm emphasized training and support to distributors in the difficult selling challengeposed by its product range, and the higher margins it offered to the general industrial supply houseswho made up the majority of its distributors. To encourage investment in business development,distributors were generally granted territorial exclusivity. In many cases, however, sales had reacheda plateau after several years in market, and Chemical had switched to a direct distribution subsidiary.The slowdown in sales growth was variously attributed to the lack of marketing capability by thedistributor or a lack of ambition to dominate the market (distributors were often small, privatelyowned organizations). In the words of the head of the firm's operations in China, “Our own peoplealways outperform even the best distributors. They run out of steam because they don't immersethemselves in our technology and the benefits it can deliver to customers.” All Chemical's 45 nationaldistribution subsidiaries had evolved from independent national distributors.

Chemical's vice president for Asia/Pacific, based in Hong Kong, had been with the companyfor 30 years, the last 16 in Asia. The region accounted for 13% of corporate sales revenues in 1995 andhad grown 21% since 1994. Over the previous two years, Chemical’s Asian operations had beenrestructured in response to their growing size, and, by 1995, there were four marketing sub-regionsreporting to Hong Kong: Eastern Asia, which included Japan and South Korea; Greater China,comprising the People's Republic of China, Taiwan and Hong Kong; Central Asia, including India;and Southeast Asia, including Singapore, Malaysia, Indonesia, Philippines, Thailand, Australia andNew Zealand. The regional Hong Kong office comprised five executives and two support staff.Chemical's products would be subject to a 30% import tariff in Vietnam. The regional vice presidentcommented:

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A lot of our attention is focused on Asia these days, because of slower growthin America and Europe and because so many of our U.S. manufacturing customersare setting up here. We have an established operation here in Hong Kong, and Iknow we can serve Vietnam well enough from our new logistics base in Singapore. Ifwe exported into Vietnam, using a representative office to provide technical support,our products would be three or four times the price of the local or Chinese adhesives

they are using at the moment.

We have received six approaches from distributors wanting to represent us— four from Ho Chi Minh City, one from Hanoi, and one from a Viet Kieu working withour products in a major customer in California. Frankly, I don’t know how toevaluate these potential distributors. I doubt if any of them have the sense of qualityand service needed to represent Chemical and sell its products effectively. I supposewe could set up a representative office to provide technical support. We have also

been approached by an SOE seeking to establish a manufacturing joint venture, butwe’re in India and the PRC already.

Sports Corporation Sports Corporation, founded in 1978, enjoyed explosive growth in its youth-and fashion-oriented market for sports footwear and apparel. Still under the leadership of its

founder, Sports ranked second in global market share in most of its product-markets. The companycontracted out virtually all its manufacturing to independent suppliers in Asia and viewed its corecompetences as product design and marketing expertise. Sports's success depended on the ability todeliver innovative products to a fast-changing and segmented market. As a result, brand building,advertising and promotion, endorsements by sports teams and celebrities, and retail channel relationswere all especially important.

The majority of Sports's products would face a 40% import tariff on entering Vietnam,although for some the rate would be only 20%. Maintaining normal margins, Sports’s cheapest pairof sneakers could retail for $35 a pair. In 1995, Sports’s major competitor had established productionin Vietnam under a processing contract. Although product from this plant was intended for re-export, it was thought that investment in production facilities would have a beneficial effect on the

brand’s market development in Vietnam. Sports executives commented that demand might prove

stronger than in other emerging markets, because of the high brand awareness spread by Viet Kieureturning from the U.S. and other countries.

Reflecting the values of its founder, Sports sought as its international distributors“entrepreneurs with their own money on the line and a fortune to be made from rapid growth.”Distributors were given territorial exclusivity and considerable autonomy as incentives to invest ingrowing their business and responding to local market conditions.

Like Chemical, Sports Corporation had in several cases bought back its distribution rightsfrom independent distributors and established a direct distribution subsidiary. The usual catalystsfor this move were financial problems in the distributor, the limited capacity of the distributor tosupport the business once it had grown beyond a certain size, or the desire of the distributorprincipal(s) to realize profits from the agency. In general, however, Sports preferred to “leave the

business in the hands of the people who know the market best.”

An alternative arrangement was a minority equity position in the distributor organization.Sports did not involve itself in operational decision making, but used its access to financial andmarket performance figures to exercise control on a “ by-exception” basis. In addition, thisarrangement enabled Sports to participate in the incremental revenue stream from any brandpremium the distributor was able to extract above the cost-plus price at which the product waspurchased from Sports.

The Asia-Pacific region accounted for 7% of Sports Corporation's sales in 1995. The firm’s

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Asian marketing organization had been restructured in early 1996. The regional vice president, whohad previously led a single team in Hong Kong, relocated to Tokyo to head a North Asia unit andwas replaced in Hong Kong by a vice president switched from Europe to take charge of the SouthAsia region.

The new regional vice president commented:

Asian markets represent our biggest growth opportunity, but we've had anumber of problems in the region, in particular the logistics of moving productaround the markets and creating the right sort of retail environment for our brand.Vietnam embodies all these issues. It's a huge, booming, young market, but it'sunderdeveloped as yet. If we wait, and one of our major competitors gets in first, wemay never catch up. But our results have been a little sluggish recently, and we mustavoid too much exposure in high-risk markets.

So far, our U.S. headquarters has received seven letters of enquiry frompotential distributors, and we have identified five additional candidates. One of theseis a company which manufactures and exports jeans and also runs a chain of fourmodern sports equipment stores in Ho Chi Minh City; they are also talking to our

competitors. Right now, there are only about 20 retail outlets where athletic footwearis being sold in a half-decent manner. There are a lot of counterfeits on the streets.

Children Corporation Children Corporation, founded in 1945, was the global leader in themanufacturing and marketing of branded toys. Against all industry trends, Children integratedalmost all its manufacturing, enabling it to reap economies of scale and achieve new quality levels ina product range of which 80% was new every year. By 1996, the firm's 15 manufacturing plants werelocated in the United States, Canada, Mexico, UK, Italy, Malaysia, Indonesia, and the People'sRepublic of China. Children used consumer packaged goods marketing practices such as co-promotions, in-store merchandising and, above all, television advertising, to expand its market. Thecompany had developed several well-known brands within its product line, which provided a

backdrop of continuity to the annual seasonal launch of its new products at the toy industry's buyingfairs. In addition, it had benefited in a number of countries from a shake-up in the retail sector, with

“category killer” hypermarkets and new entrants such as Toys 'R' Us often transforming what thefirm's senior executives claimed had been a “cottage industry of mom-and-pop stores.”

The president of the international division identified three key success factors:

First, we're the best at understanding children's play patterns, which arepretty similar around the world. Second, our manufacturing operations can delivergood-quality innovative product at the competitive price points needed to open upthe mass market. Third, we communicate well with our market through advertising,co-promotions with other entertainment companies, and cooperation with retailers inmerchandising.

Children's early international growth had been spearheaded by its business as a supplier ofcomponents to local toy manufacturers. Over time, many of these OEM customers becameassemblers, as manufacture became concentrated in a small number of low-cost centers, principallyHong Kong, and many took on distribution agencies for Children's full line of toys. Major growthoutside North America had only been achieved since the early 1980s, when Children began switchingto direct distribution subsidiaries. This era also saw an easing of the tariff and advertisingrestrictions, which the firm argued had hindered its international development, and an opening ofpreviously specialist and protected distribution trades. Children's policy when re-acquiring aninternational distribution franchise was to install a new management team of local managersheadhunted from local subsidiaries of MNCs operating in other consumer goods sectors. Asdescribed by one of the firm's country managers: “Wholesalers, distributors, and retailers are

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typically all servants of many masters. They never want one player to grow too strong. To gainmarket leadership, we have to get control of our own business and innovate.” Despite this, Childrenrecognized the value of independent distributors as market entry partners, given the closed characterof distribution systems in many country-markets, and had never entered a new country-market byestablishing a wholly owned subsidiary at the outset.

Asia/Pacific was the firm's smallest region in terms of sales revenue, accounting for 11% of1995 sales, but was regarded as having the greatest long-term potential. Children's manufacturing operations, recently expanded by the installation of substantial new capacity in Indonesia, were run as a stand-alone global division which supplied the company's marketing organizations. The firm faced uneven demand due to the seasonality of gift-giving, and therefore its coordinated production schedules were inevitably skewed to suit its largest markets at the expense of the smaller ones.

Children's vice president for Asia-Pacific was located at U.S. corporate headquarters. A smallteam of four regional staff in Hong Kong aided Children’s country managers. After an unevenhistory in Asia, attributed to the “complex and protectionist” distribution systems in the region,recent sales growth was strong, especially in Japan, where several previous ventures had ended infailure. The regional vice president commented:

Some of my colleagues say it's far too early to enter Vietnam, because of theundeveloped retail sector. We need the right retail environment to support our

brands, which despite our best efforts will be more expensive than the toys currentlyon offer. But I believe that we should appoint a distributor to start selling in Vietnamnow. In fact, our best-selling products are already available in the airport duty-freeshops in Ho Chi Minh City and Hanoi. Demand would be very concentrated in thetwo largest cities, so we could easily identify the special gift-oriented distributionchannels. Also, television broadcasting is relatively advanced, so advertising would

be possible from day one.4

We have been approached by two SOEs that make toys. Their products arelow quality and retail on average for $3 a unit, compared to our $15. However, theseSOEs claim to have access to over 1,000 retail distribution points throughout the

country, and the top managers in one of them seem young and aggressive. But I’d beconcerned about our molds being duplicated without our knowledge. We have also

been asked whether we’d be interested in a processing contract, using excesscapacity at one of these SOEs to assemble our toys for export. Given current laborrates, we could save $1 a unit if we assembled some of our more labor-intensive toysin Vietnam.

4Total advertising spending was $100 million in Vietnam in 1995, up from $31 million in 1994.

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During the Ranking in

Next 10 1995

Years Survey

No. of 274

Respondents

Citings

Ranking in

1994

Survey

No. of 284

Respondents

Citings

China 1 215 1 265Vietnam 2 113 2 114

India 3 98 7 38U.S. 4 83 4 85

Indonesia 5 66 5 83

Thailand 6 66 3 92

Burma 7 40 - -

Malaysia 8 35 6 44

Philippines 9 31 10 19

U.K. 10 16 - -


Exhibit 1 Survey of Japanese Corporations: Most Promising Countries for Future Investment

During the Ranking in

Next Three 1995

Years Survey

No. of 336

Respondents

Citings

Ranking in

1994

Survey

No. of 238

Respondents

Citings

China 1 248 1 169Thailand 2 122 2 75

Indonesia 3 110 4 58U.S. 4 108 3 72

Vietnam 5 95 6 34

Malaysia 6 73 5 57

India 7 57 10 14

Philippines 8 52 10 14

Singapore 9 32 7 33

U.K. 10 24 9 19

Source: Adapted from Export-Import Bank of Japan data.

Exhibit 2 Map of South East Asia

PEOPLE’S REPUBLIC OF CHINA

TAIWAN

MYANMAR

LAOS

Hanoi HONG KONG

THAILAND

CAMBODIA

VIETNAM PHILIPPINES

South China Sea

Ho Chi Minh City

MALAYSIA MALAYSIA

BRUNEI

SINGAPORE

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Exhibit 3 Vietnam—Economic Data

1995 1994 1993 1992

GDP (US$ millions) 19,100 13,900 12,800 9,900

Real GDP growth (%) 9.5 8.5 8.1 7.8

Exports (US$ millions) 5,200 4,250 3,010 2,600Imports (US$ millions) 7,520 5,850 3,900 2,550Retail price inflation 14.2 15.5 6.5 17.8

Source: Adapted from Economist Intelligence Unit data.

Exhibit 4 Comparative Performance Data for Asian Countries

1994, $bn

GDP 1993, $’000

GDP per person 1994, %

GDP growth

0

China

S Korea

India

Taiwan

Indonesia

Thailand

Hong Kong

100 200 300 400 500 0

Hong Kong

Singapore

Taiwan

S Korea

Malaysia

Thailand

Indonesia

5 10 15 20 0 4

China

Singapore

Vietnam

Malaysia

S Korea

Thailand

Indonesia

8 12

Malaysia

Singapore

Philippines

Pakistan

Vietnam

China

Philippines

Pakistan

Vietnam

India

Average exchangerates

Purchasing-powerparity

Taiwan

Hong Kong

India

Pakistan

Philippines

Source: Adapted from Deutsche Bank data.

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Exhibit 5 International Distribution Organization of Multinational Corporations

Chemical Corp. Sports Corp. Children Corp.

Total Global Network:

Independent distributors 11 30 5Joint ventures 0 11 1Direct distribution subsidiaries 45 17 30

Asia Pacific Region:

Independent distributors IndonesiaNew Zealand

AustraliaIndonesiaNew Zealand

PhilippinesSouth KoreaTaiwanThailand

Joint ventures (MNCownership 50% or less)

Philippines (33%)Hong Kong (33%)Singapore (33%)Malaysia (33%)

Thailand (28%)Taiwan (25%)

Direct distribution subsidiaries(100% unless shown)

AustraliaHong KongIndonesiaJapanMalaysiaPeople’s Republic ofChina(75%)PhilippinesSingaporeSouth KoreaTaiwan

Thailand

Hong KongIndia (60%)South Korea (80%)People’s Republic ofChina (66%)Japan (51%)

AustraliaHong KongIndonesiaJapanSingapore

13

Documents

Vietnam Market Entry Decision.pdf